Biz Brain: Reverse mortgages may unlock funds for retirees

Q. My wife and I are both 65. We own our home and have an existing mortgage plus a home equity loan outstanding. We’ve been hearing a lot about reverse mortgages lately. We have approximately $300,000 equity in the home and are examining our options regarding the next phase of our lives. Are reverse mortgages truly beneficial to homeowners? What are the disadvantages? Does everyone 62 years of age qualify regardless of their situation? Are there tax consequences?
— Curious

A. Anyone 62 and older qualifies for a reverse mortgage.
These allow homeowners to tap the equity in their home. Depending on the agreement you have with the lender, you might receive a lump sum, a monthly income stream or a line of credit based on the value of the home, said Michael Gibney, a certified financial planner with Highland Financial Advisors in Riverdale.

You can’t borrow the entire value of the home.

“The amount that can be borrowed is based on a formula that factors in the age of the youngest homeowner, the interest rate, appraised value and the county where the property is located,” Gibney said.

Also, the house must be fully paid off, or have a small remaining balance on the mortgage, for you to qualify. You also must continue to live in the home, and you’d also retain title and ownership of the home.

Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, said he likes reverse mortgages in some circumstances.

“Often, retirees have a lot of money locked up in their homes and they would like to have more cash in retirement,” he said. “Recent changes in these programs have cut down the upfront costs substantially, which was one of the criticisms of these programs.”

Lynch said if a reverse mortgage can unlock funds in retirement that normally would not have been spent, and if those funds can improve the quality of your retirement, it could make sense.

And the income you’d receive is tax free, he said.

Lynch said the mortgage company will eventually get back the money it pays you, with interest, if you sell the home or die. But it’s also possible for a lender to give you too much, so if your home is worth less after you die, the lender can lose funds. The lender cannot go after the family for additional assets to repay the excess portion of the loan, Lynch said.

Lynch said many clients tell him they want their homes to ultimately be inherited by their kids.

“Unless it is a beach or ski house, the day after you pass, that home is on the market,” he said. “If there is equity in their home at the end of the day, the kids get that.”

There are some disadvantages to consider.

Lenders generally charge fees for a reverse mortgage, and the interest is not deductible for you.